Harper Builds Oil Link With China After Obama Keystone ‘Slap’

About 99 percent of Canada’s crude exports go to the U.S., a figure that Canadian Prime Minister Stephen Harper says he wants to reduce in a bid to make Canada a global energy “superpower.” Photo: Mandel Ngan/AFP/Getty Images

Jan. 25 (Bloomberg) -- Prime Minister Stephen Harper is
gaining support among Canadians for his plan to ship oilsands
crude to China after President Barack Obama rejected TransCanada
Corp.’s $7 billion Keystone XL pipeline to the U.S. Gulf Coast.

Harper will meet President Hu Jintao in China next month,
when he may tout Enbridge Inc.’s proposed Northern Gateway
pipeline that would let crude flow to Asia from Alberta’s
oilsands via a Canadian port.

“The Keystone decision was a slap in the face to Canada
and it’s making Canadians rethink the relationship,” said Jack
Mintz, head of the School of Public Policy at the University of
Calgary. “Harper probably wants to put out a sign that we’re
open for business for Asia.”

Harper is pushing energy exports to Asia to reduce the
country’s reliance on the U.S. and make Canada a global energy
“superpower.” Tapping markets in Asia may raise the price
received by Canadian producers by $13.60 a barrel by 2030,
according to a University of Calgary study. About 99 percent of
Canada’s crude exports go the U.S.

“The Keystone ruling shows that we need to diversify away
from the U.S. to Asia,” Richard Waugh, chief executive officer
of Bank of Nova Scotia, the country’s third-biggest bank, said
in an interview. “The Prime Minister appreciates that and it is
no doubt a key purpose of his trip” to China.

‘Profound Disappointment’

Harper expressed his “profound disappointment” Jan. 19
after the U.S. rejected Keystone, telling Obama that Canada will
“continue to work to diversify its energy exports,” according
to details provided by Harper’s office.

Efforts to boost support for selling oil to China may be
having an impact. Opposition to the Northern Gateway pipeline
has weakened in recent weeks, according to a survey by Toronto-based Forum Research.

The share of Canadians who oppose the plan has fallen to 43
percent in a poll conducted Jan. 13, down from 51 percent in a
December survey. Support for the project increased to 37 percent
from 35 percent. The percentage of those who say they are unsure
rose to 20 percent from 15 percent. The poll of 1,211 Canadians
has a margin of error of 2.8 percent.

“It looks like a group of people are giving it a second
look,” Lorne Bozinoff, president of Forum Research, said in a
telephone interview, adding Harper may have “got people
thinking.”

Other Canadian policy makers, including Bank of Canada
Governor Mark Carney, have said Canada will need to increase its
exports to emerging markets.

‘Tremendous Opportunity’

“If you look at the nature of the U.S. recovery right now,
our exports are $30 billion lower than they otherwise would
be,” Carney said in a Jan. 22 interview on CTV Television’s
Question Period. “The Chinese market is a tremendous
opportunity for Canada. We’re under-represented there relative
to other countries.”

Canada’s benchmark stock index lagged behind the S&P 500
last year for the first time since 2003, as producers of raw
materials and energy dropped on concern that slow global growth
will limit demand for commodities and erode their prices. The
industries make up about 47 percent of Canadian equities by
market value, according to data compiled by Bloomberg.

Alberta Premier Alison Redford reacted to Obama’s
announcement by saying the province will now focus on opening
markets in the Asia-Pacific region. Asia is Alberta’s second-largest export market, accounting for about 10 percent of C$78
billion ($77.2 billion) in total exports in 2010.

‘Horrible Precedent’

Canada has already begun regulatory hearings on Enbridge’s
proposed Northern Gateway pipeline. CEO Pat Daniel said the U.S.
rejection was “horrible for our industry and it’s a horrible
precedent. It will only embolden those opposed to Gateway and
other new project developments.”

Canada “can continue to be supportive as they always
have” on Northern Gateway, Daniel said Jan. 19 at a conference
in Whistler, British Columbia. The federal government has “done
a good job calling out the issues around the regulatory
process.”

Harper has said building the capacity to sell the country’s
oil to Asian markets is in the national interest, and the
government will aim to speed the regulatory-approval process for
large energy projects. Harper has also said “foreign money”
from environmental groups is being used to try to influence
regulators.

“Just because certain people in the United States would
like to see Canada be one giant national park for the northern
half of North America, I don’t think that’s part of what our
review process is all about,” Harper said in a Jan. 16
interview with CBC television.

Regulators have received 4,507 requests by individuals to
testify at public hearings on the project that began this month.
Environmental and aboriginal groups say the project will
increase the risk of an oil spill off the coast of British
Columbia. The regulatory panel reviewing the pipeline last month
pushed back its timeline for reaching a decision to the end of
2013.

Harper’s drive to sell oil to China comes as the Asian
nation steps up foreign investment. Chinese companies have
purchased more oil and gas assets in Canada from 2005 to 2011
than acquirers from any other country, according to Bloomberg
Government.

Largest Acquisitions

Two of the largest acquisitions of Canadian oil and gas
companies last year were driven by Chinese companies. In October,
China Petroleum and Chemical Corp., Asia’s biggest refiner also
known as Sinopec, agreed to buy oil and gas producer Daylight
Energy Ltd. of Calgary. In July, Cnooc Ltd., China’s largest
offshore oil explorer, bought Calgary-based Opti Canada Inc. to
expand its oil-sands reserves. Both deals totaled more than $2
billion each.

“China’s energy security isn’t simply about shipping oil
back to China,” said Wenran Jiang, political science professor
at the University of Alberta and senior fellow at the Asia
Pacific Foundation of Canada. “There’s also trying to increase
overall global supply of oil to help manage price and supply.”

The push by Harper for closer ties extends beyond the
oilsands. Canada has been working on an agreement with China
that would give Canadian companies greater legal protection in
disputes with Chinese governments. Trade Minister Ed Fast said
in October that the two sides are close to an agreement.

Investments Welcome

Harper may seek to provide assurances that additional
investments will be welcome during his trip to China. In a Sept.
21 interview with Bloomberg, Harper said he welcomed investment
by China as long as such acquisitions are “economic in nature
and don’t have other strategic or political objectives.”

The challenge for Harper and China may be to assuage any
concerns in the U.S. that Canada is getting too cozy with the
Asian power. Harper acknowledges the U.S. will remain Canada’s
dominant trading partner for “many years to come.”

“China doesn’t want to be perceived as being predatory and
taking advantage of a weakening of the relationship between
Canada and the U.S.,” the University of Alberta’s Jiang said.
“That would cause alarmists in the U.S. to further perceive
China as a threat.”